Business management

Standard level
Paper 2

1 hour and 30 minutes

Instructions to candidates
 Do not open this examination paper until instructed to do so.
 A clean copy of the business management formulae sheet is required for this
examination paper.
 Section A: answer all questions.
 Section B: answer one question.
 Answers must be written within the answer boxes provided.
 A calculator is required for this examination paper.
 The maximum mark for this examination paper is [40 marks]
SECTION A [20]
Answer all questions.
DuffJD
DuffJD provides a laundry service for towels and sheets to three hotel chains in a major
city, Hoyluk. It provides each hotel chain with trade credit.

(a) Define the term trade credit. [2]

Competition in this market is increasing, as two rivals are planning to offer laundry
services to hotel chains in Hoyluk.

(b) Using the financial data from DuffJD for 2018, calculate:
(i) The contribution per unit per item laundered [1]

(ii) The margin of safety [1]

(c) Draw a fully labelled break-even chart for DuffJD for 2018 using the data provided
[4]

(d) Draw a fully labelled break-even chart for DuffJD with an increase of 1000 in the
fixed costs. [4]
 (e) Explain how an increase in the fixed costs might affect the margin of safety [2]

Papel
Papel manufactures and sells paper bags. It pays cash for 80% of its raw materials but,
to remain competitive, it must sell on credit to all customers. Many debtors are not paying
on time and creditors (suppliers) are increasing. The board of directors is concerned
about
Papel’s liquidity position. The finance manager has provided information from Papel’s
accounts.
(a) construct a fully labelled balance sheet for Papel for the end of October 2018 [4]
 (b) Explain one possible strategy, other than elimination of credit sales, for Papel to
improve its liquidity position. [2]

SECTION B [20]
Answer one question.
Frio Aire Appliances (FA)
Tom Donat started Healthy Start (HS), a national chain of stores preparing and selling
healthy snacks, which are produced in batches. HS’s target market is teenagers and
young adults. Tom was concerned about high levels of fast-food consumption and
youth unemployment. His vision statement for HS is: “To encourage life-long healthy
eating habits and to train school leavers (dropouts) in acquiring work skills.
(a) Define the term vision statement. [2]

FrioAire Appliances (FA) manufactures medium-priced and medium-quality

refrigerators. It is a multinational public limited company. Its factory is in a less
economically developed country that has high unemployment, a tradition of autocratic
leadership and labour costs lower than FA’s home country.
 (b) Explain one positive and one negative impact of FA on the developing country.
[4]

Market growth for medium-priced and medium-quality refrigerators is limited. As part of

a strategic objective to increase productivity and to enter a fast-growing market for
high-priced and high-quality refrigerators, FA is considering building a new factory in
and relocating production to Germany. This would require closing the factory in the less
economically developed country. The new factory will:
 Use innovative technologies, including advanced robotics and 3D processes
 Require fewer employees, but those it does require will need to have better skills
and qualifications.
Germany has a highly skilled, qualified, and productive workforce. The new factory
would allow FA to reposition its products. However, FA would need to raise significant
finance to build and equip the new factory.
(c) According to FA explain two possible economies of scale that they could
achieve. [4]
FA’s leadership style at the factory in the less economically developed country is
autocratic. Members of FA’s board wonder whether this style would be suitable for the
new factory in Germany, where workers have more bargaining power because of their
high skill level and the labor-friendly cultural traditions. In Germany, FA would have to
follow more regulations regarding the environment, health and safety, and employee
rights. FA workers in the less economically developed country are very loyal to FA,
which has continued operation through a civil war at significant cost to itself (for
security). If FA were to close in the less economically developed country, the workers
would not find such good jobs.
(d) According to the Ansoff Matrix evaluate the option of building a factory in, and
relocating to, Germany. [10]
Vinn
Vinn is an American public limited company. It mass-produces jeans. Twelve years ago,
production was offshored to China and Turkey to reduce manufacturing costs. To benefit
from economies of scale, Vinn sells standardized regular-fit jeans. Vinn uses an identical
marketing mix everywhere they sell.
(a) Define the term offshoring. [2]

(b) Explain one advantage and one disadvantage of operating as a public limited
company. [4]

Despite the global popularity of American jeans, Vinn has experienced a significant fall
in demand due to: customer complaints about poor quality jeans, economic recessions
in Vinn’s main markets. However, economic forecasts expect
improvements within two years, increased global competition of mass-produced clothes,
anti-globalization pressure groups. For example, a local pressure group, “B-Local”, has
criticized Vinn’s undifferentiated advertising campaigns as inappropriate for all markets
and segments.
(a) Explain one advantage and one disadvantage for Vinn of using identical
marketing mix. [4]
In addition, Vinn’s management is worried about labour costs in China rising faster than
the United States (US). It also has communication problems with its offshored
employees. Vinn’s management decided to re-shore back to the US and completely
change its strategic focus. Recent market research has revealed a niche market: some
customers in North America are willing to pay high prices for individually designed and
produced jeans. To create a new competitive advantage, Vinn will aim for different market
positioning by using highly skilled, creative fashion designers located in major American
cities. Cost-effective production of individually designed jeans requires specialized
technology currently available in the US. Vinn will no longer mass-produce jeans.
(b) Discuss Vinn’s decisions to re-shore back to the US and to produce only
individually designed jeans. [10]